LONDON, Sept 2 (Reuters) - The ECB may soon be forced to follow the Bank of Japan’s example and buy equities as part of any expanded stimulus programme, but it faces significant hurdles in helping all 19 euro zone members equally without distorting a key market for investors.

The European Central Bank could run out of eligible bonds for its 1.7 trillion euro bond-buying scheme, meaning alternative options are on the table should it decide to loosen policy further to lift growth and inflation across the bloc.

Analysts say these could include large-scale share buying, a policy that the BOJ has already adopted after it started purchasing equity exchange traded funds (ETFs) for its own quantitative easing scheme six years ago.

ETFs allow an investor to trade a range of assets, from a basket of stocks to government debt. ETFs, which offer a convenient way to purchase a broad basket of securities in a single transaction from an exchange, have risen in popularity with investors due to their simplicity and lower fees.

But buying ETFs in the 19-nation euro zone would be far from simple for the ECB, both practically and politically.

“How do you buy an index which favours all countries within the euro zone? Obviously the ECB doesn’t want to be seen favouring one market above another,” said Commerzbank economist Peter Dixon.

The BOJ doubled its ETF purchases in late July to an annual pace of 6 trillion yen ($58 billion). According to SPDR ETFs, the BOJ is now estimated to hold almost 50 percent of the total Japanese ETF market.

Investments in Europe-listed ETFs are worth just over $500 billion, compared with nearly $200 billion in Japan and more than $2 trillion in the United States, according to consultancy firm ETFGI. tmsnrt.rs/2bZ1IkA

Although the European ETF market is bigger than Japan’s, such a scheme would have to benefit 19 member states, from heavyweight Germany to much smaller Slovakia.

If it buys an ETF that tracks a pan-European stock index such as the Euro STOXX 50 or MSCI’s EMU index , which are weighted in terms of market capitalisations, the ECB runs the risks of being seen to favour only the bloc’s biggest economies or sectors.

But if it bought single-country ETFs, then it could run into liquidity issues since the ETF market is still developing.

CAREFUL

Of the top 10 firms listed by market cap in the MSCI EMU stock index, four are French, three are German, with the rest listed in Belgium, Spain and the Netherlands.

The BOJ’s foray into equity buying highlights potential pitfalls. While the BOJ does not reveal details of its buying, analysts say it disproportionately benefits a handful of high-priced shares that have outsized weightings in the Nikkei stock average.

The ECB has been careful to limit its asset buying in a way which follows some orderly distribution across the region.

Under its government bond-buying scheme, the ECB buys bonds in relation to a country’s contribution to the bank - although it has deviated from this already in purchases of corporate bonds.

“As with the current bond buying programme, the capital key would certainly be an issue they have to think about,” said Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, part of State Street Global Advisors.

“This would determine the choice of the index and/or the strategy. Then one would need to look at the current product availability. This would also skew the impact on the larger contributors to the euro zone economy which may need less of that support compared with those of the periphery for example.”

The ECB gathers next week and since it last met, other major central banks, such as the Bank of England, have ramped up their monetary easing efforts.

There are many options available to the ECB before it chooses to buy ETFs and tweaking the parameters of its current bond-buying programme would also ease pressure on the central bank to follow more radical measures such as stock purchases.

Partly because of the complexity and because stock investments are not as prevalent in Europe as in the United States, there may be fewer benefits from such a plan than from other options.

Asked in May whether the ECB would contemplate buying equities, its vice president Vitor Constancio said only that no further measures would be adopted so soon after policy was eased in March. At least two ETF providers contacted by Reuters said they had not been in any discussions with the ECB.

“Equities are fraught with more questions and that would make buying by any central bank a little more difficult of a pill to swallow,” said Thomas Bartolacci, head of ETF Capital Markets, U.K., at Vanguard, the second-biggest provider of ETFs in the world after BlackRock. (Editing by Jamie McGeever and Toby Chopra)